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Can Open Source ERP Succeed?

Is there a path to open source applications success?

Open source has been a great success for infrastructure software such as Linux, Apache and MySQL. Here at Software Advice, we've made use of all three. We've also made extensive use of open source development libraries like jQuery. For apps, however, we have either rolled our own or deployed commercial Software-as-a-Service (SaaS) offerings.

We're not alone in that decision. Open-source applications have failed to gain mainstream acceptance. Despite passionate communities and a compelling value proposition, businesses just aren't buying open-source enterprise applications. The lone exception, from what I can tell, is SugarCRM (more on this below). But why not enterprise resource planning (ERP)? Why hasn't an open-source ERP player gained critical mass?

With so many ERP implementations getting long in the tooth, many businesses are yearning to break free from vendor lock-in. To a significant extent, open source offers freedom from vendor control. This, after all, was the original value proposition for open source, even though the whole "free" part gets most of the attention. It seems there is an opportunity for a vendor that does things differently. Can open source ERP succeed?

Here I examine the challenges open source faces in the applications market. In conclusion, I turn the question around to my readers: What do you think it will take to make open-source ERP take off?

Enterprise Applications Are Sold, Not Bought
Enterprise applications require sales and marketing to encourage widespread adoption. The traditional strength of open source is in development - thousands of developers contributing code to a greater good. The open-source expectation is that free software will sell itself. Early adopters will embrace the free technology and rave about its capabilities; the majority will follow the buzz. This has proven effective for open-source infrastructure, where the users are curious developers with the inclination and skill set to tinker with new technologies.

Enterprise applications are different. There is an expectation by the buyer that their hand will be held by doting sales professionals throughout the sales cycle. And they need it. Too many line-of-business buyers are groping in the dark during the software selection process. As a result, the best product rarely wins in the enterprise apps market. The best sales and marketing wins. In the case of ERP, open-source players are helplessly outmatched by Big ERP's sales and marketing muscle. Oracle spends $4.6 billion a year on sales and marketing, while SAP spends $2.8 billion.

Capitalists Make Poor Contributors
Community contributions are central to the open-source model. Traditionally, the largest area of contribution has been developers writing and contributing code. However, contributions are also made in quality assurance, documentation and support. Again, this has worked well for open-source infrastructure where technology is coded for developers, by developers. There is an admirable sense of partnership between these birds of a feather. A developer's necessity spurs innovation, while altruism and a desire to be recognized drives her to contribute that code to the open-source project.

This model breaks down when business people enter the picture. As capitalists, they are compensated to grow their firm's profits, not support a community. Business people seek a proprietary competitive advantage. As a result, they are unlikely to share their innovations. In most cases, business people will support the core of an open-source project; however, they will soon seek to monetize differentiated extensions and other value-added enhancements to the project. Based on what I've read of the Compiere chronicles, it appears that the competing financial motivations of the sponsor, channel and contributors were behind many of that project's challenges.

Application Development Requires Domain Expertise
When it comes to open-source infrastructure, contributing developers are coding in their comfort zone - deep in the technology stack. But when they're asked to code business applications, they move beyond their comfort zone. For application development, developers need detailed product requirements, which are traditionally delivered by a business-savvy product manager. In open source, this pairing is difficult as a result of the point we made above: business people are less likely to contribute.

Again, the Compiere story is informative. Members of both the Compiere project and its subsequent fork, ADempiere, note that community contributions were primarily technical. These include database ports, performance enhancements, and new web client technology. Once again, we see the developers contributing the underpinnings they felt to be critical. Meanwhile, functional enhancements were developed by commercial entities - Compiere, Inc. and its channel partners - but were typically monetized as proprietary code, rather than contributed.

SugarCRM Has Succeeded, but It's Fake Open
SugarCRM stands out as the one open-source application project that has gained critical mass. In fact, SugarCRM has emerged as a viable alternative to industry leader Salesforce.com. However, SugarCRM's success has been achieved through a commercial effort that is almost indistinguishable from a traditional proprietary software vendor. The company has raised over $50 million in venture capital, it has a dedicated sales team, and it employs savvy marketing. Finally, it sells Professional and Enterprise editions, which are essentially commercial software.

Is this true open source? The community edition may be free, but it is flimsy in comparison to the commercial editions. From my perspective, SugarCRM is a commercial software product.

Is There a Path to Open Source Applications Success?
I don't pretend to have the answers to a problem many capable people have failed to solve, but allow me to suggest some ideas to get the conversation started:

  • Avoid traditional venture capital. I believe that most venture capitalists have lost interest in open-source. That's fine. These professional investors are seeking growth and profits that are unlikely to be achieved in open source. Their demands will kill the project.
  • Seek out strategic investors. An ideal alternative to venture capital would be a diverse group of corporate investors. They represent "patient money," and they can contribute domain expertise. Nevertheless, they should not gain control through the investment.
  • Focus on commodity functionality. Commercial entities are most likely to contribute functionality that they consider a commodity or undifferentiated. Critical mass could be gained by concentrating on applications like financial accounting and human resources.
  • Leverage the Cloud. Cloud hosting of open-source solutions (like this instance on Amazon EC2) eliminates much of the technical complexity of open-source solutions. Meanwhile, it can provide a new revenue steam for monetizing the project.

What do you think will be needed to make open-source ERP work?

A special thanks to Jonathan Pemeco of Pemeco Inc. for providing insights for this article.

More Stories By Derek Singleton

Derek Singleton recently graduated from Occidental College with a degree in political science. He writes about various topics related to ERP software and covers the manufacturing, distribution, and supply chain management software markets.

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